The Future of Bank Branching

Two of the current challenges in banking are 1) Gaining Efficiencies, and 2) Utilizing Technology to improve delivery channels. Some strategies are more complicated than others in terms of how to address these two challenges. However, some are more straightforward than you might think.

Tom Brown has made an interesting appraisal of the need for a big branch network in today’s banking world: “Did you see earlier this month that, to cut costs, a couple of banks in the Midwest announced they’re shutting down some of their under-performing branches? Good for them. I’m just surprised more banks aren’t doing the same thing.One of the more pressing—and least-talked-about—issues facing the banking industry is the question of what the heck banks are going to do to contain the costs of their sprawling distribution systems, particularly their branches. Even before the passage of Dodd-Frank added new financial burdens to the industry, branch networks were set to become a serious money pit. First, alternative delivery channels, from ATMs to on-line banking, are cheaper and more convenient for customers. (The newest innovation set to go mainstream, remote deposit capture, will dispose of the final rationale for many more bank customers to ever visit their branches at all.) As it is, in-branch transactions have been declining for years. By many measures, the numbers are truly tiny. For example, the typical branch generates just 20 new demand deposit accounts per month. Yet the industry remains wildly overbuilt, thanks to the branch-building boom that took place during the middle of the last decade. Many of these newer branches (along with marginal legacy branches) are burning cash. This can’t go on forever.

The economics of bank branches vary broadly and can change depending in the level of interest rates, but a good rule of thumb is that a branch needs to have $40 million in deposits to be profitable. If that’s so, a huge number of the country’s bank branches are money losers as it is—and many more will be once interest rates start to rise from their ultra-low levels and savers pull their deposits to seek higher yields elsewhere. Some banks have done what they could to bring branch costs down—by cutting staff, for instance. But in many cases, that won’t be enough. Managements who think they can magically make their most marginal branches profitable are kidding themselves.

Yet despite the challenges branches face, the bankers I talk to seem to be dealing with the problem by basically not thinking about it. Too many apparently believe it will go away by itself. Which is why I think it’s great that Independent Bank Corp. and Old National are proactively recognizing that they have a problem, and are doing something about it. For further discussion about this issue, click here and give me your contact information on the form that pops up.

New technology (and poor prior branch-opening decisions) are making branch banking in its current form untenable. The sooner banks tackle the problem, the better.”